UK: Are Smart Contracts A Real Thing Yet?

An Update From The Second R3CEV Smart Contracts Template
Summit.

In August, we reported on the challenges and opportunities
discussed at the
roundtable summit on smart contract templates. The second
summit on 16 November was again held simultaneously in London and
New York, and hosted by Barclays and blockchain technology company
R3CEV LLC, which now leads a consortium of around 70 global
financial services companies. There were many experienced
attendees, including investment banks, ISDA, FIA, and UCL's
computer science unit, amongst others.

Inevitably, much of the language and discussion remains
intellectual and techy, so we've pulled out some of the key
themes from this summit. For those that want to get into the detail
the presentations from the event are now
publically available

The requirements for smart legal agreements?

The first research paper by Barclays and UCL looked at the
foundations, design landscape and research directions of smart
contract templates. Their upcoming second research paper looks at
the key requirements for smart legal agreements to become
reality:

Methods for creating and
editing.

Standard formats for storing,
exchange and retrieval.

Methods to add signatures.

Methods to link legal prose and smart
contract code.

Methods to engage with a dispute
resolution process.

Standards, interoperability and avoiding unnecessary
variation

Interoperability is still (and will continue to be) an ongoing
theme. The standardisation of language, templates and underlying
tech is still a long way off and there is plenty of variation in
the markets for various financial products (derivatives, trade
finance, etc). The issues are ultimately business (not academic)
problems, so standardisation will therefore require a change in
business culture, as well as the legal framework with the ultimate
form of smart contracts decided by the community.

There are now discussions about whether we can have multiple
standards - to reflect multiple financial products –
connected by an interchange format. ISDA is already engaged in
respect of OTC derivatives and the FIA is putting smart contracts
on the 2017 agenda. And more wide-spread collaboration between
20-odd trade associations is also on the horizon.

Lawyers need to engage (and disrupt themselves?)

As for legal prose templates for particular financial products,
law firms have been heralded as a great source - but, before we can
glow with pride, it was noted that we're still far too slow and
cumbersome, and need to engage on developing and rationalising the
legal prose aspects to match developments on the code developer
side. Though, we have (rightly) been warned to leave our precious
egos at the door when it comes to pushing style over substance in
potential templates.

The evolving role of discretion and data vendors

Discretion is still a concern, especially in the multi-lateral
context of cleared derivatives; it has been called 'the enemy
of smart contracts'. Oracles are a popular potential solution
to act as a "single source of truth" and could perhaps be
built into the core processing of smart contracts to ensure
automation, especially when combined with AI (although this is
still the realm of future tech). But there are questions as to
whether the use of oracles perhaps unnecessarily centralises data
sources which may introduce legacy and cost issues down the line.
The challenge here is for data vendors to collaborate.

Approaches to dispute resolution

Dispute resolution wasn't discussed in detail during the
first conference but was a major part of the second and the drive
was that this should be considered in parallel with questions of
enforceability and determining appropriate templates.

There were strong reminders (e.g. from the Ethereum DAO) that a
smart dispute resolution mechanism needs to be built into the
contracts. Potential options included negotiation, mediation,
arbitration and the courts (in order of increasing formality, time,
cost and complexity). Ultimately, arbitration (e.g. by the
Electronic Data Interchange, etc) is seen as a natural fit for
borderless and automated contracting thanks to the availability of
expert tech knowledge and reduced costs compared to the courts.

2017 is the year to make things real

A phenomenal amount has already been accomplished since the
first summit in June. Though much remains to be done:

Following the first Barclays/UCL
research paper, a second is expected to be released soon and there
is a need to expand the range of research papers, both on
developing code and dealing with outstanding conceptual
issues.

The importance the FCA places on protecting vulnerable consumers has become increasingly clear with the recent publication of its Financial Lives and draft FCA Mission: Our Future Approach to Consumers documents.

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